With temperatures as much as 30 degrees below normal in parts of the Rockies, Southwest, and Midwest, consumption remained at elevated levels and prices rose significantly during the report week. Following two weeks of slight decreases, the price at the Henry Hub increased $0.15 per MMBtu to $4.55 per MMBtu. Three months into the 5-month heating season, the colder-than-normal weather this year has resulted in the Henry Hub price gaining $1.13 per MMBtu, or 33 percent, since November 1. However, the price is still well below (17 percent) the price of $5.47 per MMBtu at the Henry Hub this time last year, as storage levels still exceed the average for this time of year and the production outlook for the industry remains strong.

During the report week, price changes at specific market locations depended largely on local weather conditions and constraints in transportation into local markets. Differences in pricing dynamics were evident in the Gulf region, where prices in southern Louisiana and nearby Texas diverged. While market prices in Louisiana generally increased in the range of 20-25 cents per MMBtu, prices in nearby Houston, Texas, climbed more than $0.50 per MMBtu. Demand in Texas for natural gas in the electric power sector soared during the week in order to meet heating needs from the current cold spell. The operator for the electric power grid in Texas on Wednesday noted record-levels of demand for this time of year as well as cold-weather-related mechanical failures at power plants, which has resulted in rolling blackouts across the State.

The largest percent price increases during the week occurred in markets west of the Mississippi River, where there has been little price volatility this winter.In the Rockies and Midcontinent, where weather conditions were extreme and there were numerous reports of declines in production due to icing conditions at producing wells, price increases exceeded well over $1 per MMBtu or about 30 percent. BENTEK Energy, LLC, reported that flows on pipelines shifted significantly as higher demand in localized markets in the Rockies decreased flows on other pipelines that transport supplies out of the Rockies to the east, such as the Rockies Express Pipeline. In addition, numerous Midcontinent and Rockies area pipelines reported constraints on their systems, resulting in losses of flexibility to move gas between regions (see Transportation Notes below). Prices in the Rockies increased at all trading locations. For example, the price for supplies on the Questar Corporation system in Utah increased $1.39 per MMBtu to $5.46, the highest price reported at this location this winter.

In the Northeast, prices rose above $10 per MMBtu at certain markets as high local demand resulted in pipeline constraints. The spot natural gas price at the Transco Zone 6 trading point in New York City was highly volatile, peaking during the report week at $10.12 per MMBtu for delivery on Thursday, January 27, before falling below $7 on Tuesday, February 1. On the week, the price at Transco Z6 increased $0.73 per MMBtu, following a sharp increase yesterday. In the western portions of the Northeast, price gains were significantly less on the week, and the sharp price spikes seen in New York and elsewhere did not occur. The spot price at Dominion South in western Pennsylvania settled at $5.10 per MMBtu yesterday, higher on the week by $0.47. The stark difference in intraregional prices resulted from pipeline constraints between western and eastern portions of the region. Short-duration price spikes related to pipeline constraints in the winter have been fairly common in New York City and New England. However, almost 4 Bcf per day of new pipeline capacity is targeted to enter service before November 2011, in large part to move more gas from the new shale wells in the Marcellus play to downstream markets.

The general increase in prices this week likely reflected continuing strength in demand during the report week. Compared with the prior Wednesday, natural gas consumption yesterday was 11 percent higher, according to BENTEK, which monitors flows on the pipeline grid to arrive at daily estimates of supply and demand. U.S. natural gas consumption increased to 103 Bcf per day as of yesterday. Combined consumption in the residential and commercial sectors increased 10.7 percent, and was well above 50 Bcf for most of the days of the report week. In the electric power sector, increased demand for electricity for heating purposes, primarily in the Southwest, contributed to a 28.6 percent increase in natural gas consumption relative to the prior Wednesday. Overall, U.S. demand was 1 percent higher than the comparable period in 2010, according to BENTEK.

U.S. production during the report week, which averaged close to 62 Bcf per day, was lower on the week, likely owing in part to well freeze-offs in the Rockies and Southwest. BENTEK reported at least 600 million cubic feet (MMcf) per day of reduced production in Texas alone. In addition to the lower U.S. production for the week, Canadian imports dropped to an average of 8.0 Bcf per day, nearly 3 percent lower than the previous week. Nonetheless, U.S. production continued to provide a context of abundance to current supplies, averaging 5.7 percent higher than the comparable period last year, according to BENTEK.

At the NYMEX, the price of the near-month contract for March delivery decreased $0.07, or 1.6 percent, during the report week, to $4.43 per MMBtu. The decrease occurred likely in response to expectations of a reprieve in extreme cold in consuming regions of the country, thus decreasing space-heating demand. While the current cold will likely result in large withdrawals from storage in EIA’s storage report next week, the current strength in supplies may suggest that the cold weather has not changed the fundamental outlook for the industry. The March 2011 contract is trading lower than the settlement price of the March contract in 2010. The March 2010 contracts expired at $4.82 per MMBtu, or 8.7 percent higher than the current contract price. The price of the 12-month strip, which is the average for futures contracts over the next 12 months, decreased during the report week by about 1 cent per MMBtu to $4.70 per MMBtu. In the strip, prices increase through January 2012. During the week, monthly prices decreased in consecutively smaller increments through next fall, but larger increments into and during the winter months. The highest-priced contract in the 12-month strip is for January 2012, which as of yesterday was priced at $5.12 per MMBtu.

Storage

Working natural gas in storage dropped to 2,353 Bcf as of Friday, January 28, according to EIA’s WNGSR(see Storage Figure). TThe 189 Bcf draw is much larger than the 5-year average draw for the week of 165 Bcf and particularly last year’s draw of just 111 Bcf for the report week. Stocks are now 69 Bcf below last year’s level and a mere 5 Bcf above the 5-year average.

The week’s draw marks the second week in a row that stocks have declined much more rapidly than last year.Last week’s year-over-year surplus became a significant deficit as a result of a second week in a row of very cold temperatures relative to last year. Despite significant year-over-year production growth, a frigid winter is forcing suppliers of residential and commercial consumers to draw heavily on working gas stocks for heating uses.

Temperatures were colder than normal and much colder than last year in the lower 48 States during the week ending January 27. The National Weather Service’s degree-day data show that the temperature in the lower 48 States last week averaged 30.1 degrees, 3.6 degrees colder than last week and the second coldest average temperature this winter (See Temperature Maps and Data). This compares to a 5-year average temperature of 33.4 degrees and last year’s temperature of 38.9 degrees for the report week. Relatively warm weather in the West was offset by colder-than-normal weather in most of the rest of the country for the second week in a row, especially in New England, which was 9.3 degrees colder than normal. Heating degree days were over 32 percent higher nationwide this week compared to the same week last year.

Other Market Trends

Marketed Production in November Reaches 61.5 Bcf/d. On January 28, 2011, EIA released the Natural Gas Monthly, which contains State and national-level estimates of natural gas volume and price data through November 2010. U.S. natural gas production hit its highest level ever for November, at 63.5 Bcf per day. This is an increase of almost .7 Bcf per day, or 1 percent, from the previous month, and an increase of almost 9 percent from November 2009. Natural gas consumption increased month over month, as colder weather increased demand for heating. Total consumption rose from 53.3 Bcf per day in October to 65.8 Bcf per day in November; in November 2009, consumption was 59.0 Bcf per day. This year, heating degree-days in November totaled 523, an increase of about 18 percent from the same month last year. Residential consumption more than doubled from October 2010 to November 2010. The average natural gas wellhead price declined from October to November, falling from $3.79 per MMBtu to $3.43 per MMBtu. As of the end of November, working natural gas in storage totaled 3,772 Bcf, indicating a withdrawal of 74 Bcf over the month of November.

Natural Gas Transportation Update

- Several pipelines posted notices in reaction to the increased demand due to cold weather. According to BENTEK, demand in the Rockies reached record levels on Tuesday and Wednesday due to a cold weather pattern that was moving east. On February 2, Westcoast Energy, Inc. issued a low-linepack Operational Flow Order due to system drafting. Similarly, Kinder Morgan Interstate Group pipeline issued a notice that, effective February 2 until further notice, Kinder Morgan Interstate Group is at capacity for received quantities from Cheyenne Plains. Based on the current level of nominations, interruptible and secondary quantities are at risk for not being scheduled. Colorado Interstate declared a system-wide strained operating condition due to an inability to absorb imbalances as storage withdrawals are at maximum capacity.

- The weather also affected natural gas flows on Kinder Morgan’s Rockies Express Pipeline. Although the capacity of the Rockies Express Pipeline leaving Wyoming has been nearly fully utilized, segment flows to the pipeline’s terminus in Clarington, Ohio, were at their lowest levels on February 2 since the opening of the pipeline, according to BENTEK Energy. Flows to Clarington have averaged 1 Bcf per day since the service began. On February 2, the amount of natural gas reaching Clarington was half that level. This would indicate that natural gas that normally ends up in Clarington was delivered upstream.

- El Paso Natural Gas Pipeline issued an Emergency Critical Operating Condition Declaration for February 2 until further notice. According to the notice, due to “current supply shortfalls caused by extreme cold temperatures and power outages in the production areas connected to the system and current demand on the delivery side of the system,” El Paso did not expect conditions to improve in the next 24 hours. El Paso placed underperformance caps in nomination Cycle 4 on February 2. Their Washington Ranch natural storage facility was on maximum withdrawal.

- Effective February 3, Transwestern Pipeline Company issued a critical notice that an Alert Day was in effect systemwide due to low linepack. If actual volumes vary from scheduled volumes in the direction of the low line pack position, a penalty may be imposed on operators.

- Storage operators have also posted notices in reaction to higher levels of demand. Both the Moss Bluff storage facility in Liberty County, Texas, and Egan Hub in Acadia Parish, Louisiana, scheduled and sealed all withdrawal activity for their facilities for February 2—no additional increases in withdrawals were accepted. Both facilities anticipate continued high withdrawal rates for February 3 through February 5 and noted that restrictions to interruptible services may be required beginning on February 3.